Is the Revocable Transfer on Death Deed the Best Way for You to Transfer your Real Properties to your Heirs and Avoid Family Conflicts After your Passing?
In 2016 California enacted the Revocable Transfer on Death Deed law. This law provides property owners with a new method of transferring title to real property upon their death without the necessity of probate. This law was set to expire on January 1, 2022, but has been extended to January 1, 2032, with some modifications.
As a reminder, probate is a court case that deals with: Deciding if a will exists and is valid, figuring out who is the decedent's heirs or beneficiaries, how much the decedent's property is worth, and transferring the decedent's property to the heirs or beneficiaries.
Prior to the enactment of the Revocable Transfer on Death Deed law, the most common ways used to transfer real property upon death were through:
1. A revocable living trust which avoids probate. A revocable living trust is a trust document created by an individual that can be changed over time. Revocable living trusts are used to avoid probate and to protect the privacy of the trust owner and beneficiaries of the trust as well as minimize estate taxes.
2. A will which would require probate. A will is a document that directs what happens with the property that you own when you die. The will must be in writing and must be signed by the testator.
3. Community property with right of survivorship which would not require probate. Community property with the right of survivorship refers to a real estate property that is jointly owned by both spouses. On the death of one spouse, their 1/2 share will pass directly to the other spouse without going through probate.
4. Joint tenancy with right of survivorship which would not require probate. Joint tenancy with rights of survivorship is a type of account that is owned by at least two people. They are also afforded survivorship rights in the event of the death of another account holder. In simple terms, it means that when one partner or spouse dies, the other receives all of the money and/or the property.
Like in any of the above-mentioned alternatives, there are advantages and disadvantages to using the Revocable Transfer on Death Deed to transfer your real estate properties upon death without probate. To allow you to make an informed decision, you will find below is a recap of the pros and cons of the Revocable Transfer on Death Deed.
1). Pros of the Revocable Transfer on Death Deed
1. Filing and recording a Revocable Transfer on Death Deed is less expensive than hiring an attorney to prepare a living trust or a will;
2. The Revocable Transfer on Death Deed allows you to avoid probate;
3. The Revocable Transfer on Death Deed can be revoked;
4. With a Revocable Transfer on Death Deed the owner retains full ownership of the property rather than transferring his/her interest to another person with a joint tenancy;
5. With a Revocable Transfer on Death Deed taxes are not affected during the lifetime of the owner. On the contrary, if a joint tenant is added to the title, it is considered a gift by the IRS, and a gift tax return is required. Also, if a joint tenant is added, it will trigger an increase in property taxes.
2). Cons of the Revocable Transfer on Death Deed
1. With a Revocable Transfer on Death Deed if the named beneficiary predeceases the owner, the real property would be subject to probate;
2. With a Revocable Transfer on Death Deed if a property is owned under joint tenancy, the property will pass to the surviving joint tenant(s);
3. Title insurance policies may be void once the Transfer on Death Deed is recorded. Many title insurance companies will not issue title insurance on real property transferred by this method. Some title insurance companies even require a three-year waiting period. That means a beneficiary must hold the property for three years without selling it or borrowing against it;
4. With a Revocable Transfer on Death Deed if the owner becomes incapacitated and there are no other estate planning documents prepared, then a conservatorship would be required in order to manage or sell the property. On the contrary, if the real estate property was held in a trust, the trust would generally allow the successor trustee to sell the property or to borrow against the property in order to have funds available to pay for care for the owner;
5. With a Revocable Transfer on Death Deed if the owner who created the Transfer on Death Deed becomes incompetent, it is impossible to change the deed. This could be a problem if the named beneficiary dies or other changes in the family relationships were to occur;
6. Because of the ease of creating a Transfer on a Death Deed, there is a greater chance of fraud or undue influence by family members towards the owner of the property.
While the Revocable Transfer on Death Deed provides a simple way to avoid probate for the owners of a real property, based on our experience as mediators, it also sometimes provides a simple way for some of the heirs to commit elder abuse. Here is one of the most common situations we encounter at Mediation Path Silicon Valley where a Revocable Transfer on Death Deed can lead to major family feuds:
All the children of a property owner have moved away but one unemployed child had moved in with mom in order to provide care for her. In this configuration, how simple would it be for an unscrupulous child/heir to get the transfer on death deed form, convince mom that he/she is entitled to receive the home, and take mom to a notary public to sign the form and have two people witness the deed? All done without the knowledge of the other children and without any involvement of an independent attorney.
While this scenario could play out by taking mom to an attorney to create a will or a trust leaving everything to one child, the difference is that when an attorney is involved in such dealing, he/she would privately discuss this transaction with mom prior to it being implemented to ensure that mom is competent, understands the effects of the transfer and would check her willingness for this to occur.
Therefore, if you are currently dealing with the above-described situation, you are probably wondering what can be done when a Transfer on Death Deed has been misused? The answer to this is quite simple: